Adding Value in Student-Managed Funds: Benchmark and Sector Selection

Abstract

Student managed portfolios offer a practical learning environment but often miss opportunities for outperformance. We provide several recommendations for structuring fund trades to enhance the pedagogical experience for the students in addition to generating alpha. A strategy that targets mid cap stocks offers favorable risk-return characteristics and focuses on a market capitalization category that receives relatively less attention from professional money managers. Furthermore, a formal sector allocation strategy provides an additional source of portfolio outperformance when utilizing a metric that is robust to differences in companies across sectors. We document the high relative return dispersion among sectors in mid cap stocks and show that EV/EBITDA is a consistently effective ratio in both identifying undervalued and overvalued stocks.